Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises

We describe features of the Chinese financial system that inhibited effective financial intermediation from 1980 to 1994 and investigate whether, despite these impediments, bank finance flowed to state-owned enterprises with higher subsequent productivity than did direct government transfers. We find that it did, at least in the 1980s, and conclude that bank employees assessed SOE credit risks substantially better than did the bureaucrats responsible for allocating direct transfers. Banks imposed harder budget constraints on SOEs than bureaucrats, but those constraints softened as the 90s progressed. As a result, increased bank finance did not flow to relatively productive SOEs later in the period.